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EFFECTS OF
PRELIMINARY ESTIMATE ON FINAL ACCOUNT OF BUILDING PROJECTS
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Ever since
the dawn of civilization, man has indulged in some form of construction
activity. Even in ancient times, man created architectural Marvels which came
to be regarded as wonders of the world including the pyramids of Egypt, the
Great Wall of China, and the tower of Babel among others.
Estimates
for engineering construction and building project are extremely important for
the financier. The primary function of this process is to produce a forecast of
the probable cost of a proposed project before the detailed design and contract
particulars are prepared (Onwusonye, 2006; Pratt, 2011). Prospective clients
require budget estimate at the early stage of the project to manage and
forecast their intended financial commitment before extensive work on the design
is done. A feasibility estimate is therefore an important document that helps
the client in carrying out a detailed study on the viability of his proposed
project with a view to determining whether the investment is worthwhile.
Estimating
therefore describes the technical process of predicting the probable costs of
the project based of specified information (Akintoye, 2000). The estimating
process is broadly divided into two types namely: feasibility and tender
estimating depending on mainly on the stage of the project and amount and
quality of available information (Pott, 2008). However, the use of one approach
precedes the other in the project development life cycle thereby making the
context of predictive accuracy an important discourse in cost management
literatures.
The
feasibility estimating has gained more interest based on its level of important
to the overall cost performance of the project. Feasibility estimating is there
probable assessment of the probable cost of project at the early stage of the
project when the design is not fully developed. However, lack of theories on
construction price forecasting is a major factor that has restricted empirical
progress in cost forecasting (Akintoye, 2000).
One of the
major problems facing the Nigerian construction industry and in the global
perspective is the fact that most projects are completed at sums higher than
their initial contract sum (Achuenu, 1994; Gundiri, 1998). As a result, initial
contract sum is rarely relied upon for decision making. The contract price
obtained at the pre-contract stage of construction projects form the contract
sum; and it is the amount established for the project. The expectations are
that this sum should not be exceeded. Despite the veracity of this fact in
practice and research, building construction projects are rarely completed
within the estimated cost (Chindo, Okoli, Fadason and Gandu, 2012). Studies by
Elinwa & Buba (1993) cited in Chindo, Okoli, Fadason and Gandu (2012)
established cost variances between 8 to 133%; and an earlier study by Giwa
(1988) pegged cost variability at 113% between the feasibility estimate and
final cost of the project.
The research
space has largely developed towards the study of variance between contract sum
and final account. The trend has left a significant gap in determining the
events in the procurement process between feasibility phase and contract sum.
This study argues that, the contract sum is developed from a comprehensive
design information than feasibility estimate; hence the need to evaluate the
relationship between the later estimate and the former. This study therefore
seeks to examine the effect of effect feasibility estimate of final account.
1.2 Statement of the Problem
The
feasibility of construction projects as decision tool is received with
optimistic expectations, first that it may never be adequate; and second, that
it may never be exhausted (Tate & Flanagan, 1997). This pessimism
originates the spates of project cost performance failure over the decades. Construction
projects across the globe are bedeviled by cost deviation and overruns.
Flyvjerg (2005) found that construction projects are completed at about 28%
above budget. Mahamid (2013) reports 16.73% cost deviation, the mean cost
overrun of 7.9% is reported in Odeck (2004), and Cantarelli et al. (2012)
reports cost deviation of 11%. Scarcity of world’s economic resources informs
the increasing important to reconsider the controversial disposition of cost
overrun. The wide infrastructure gap in many places are alarmingly high
including Nigeria.
Cost
differential is therefore perceived as endemic (Odeyinka, 2015) and the
stakeholders in the construction sector are burdened to mitigate cost overrun.
For the construction professionals to have credibility before the client,
Mbachu (2012); Larkin et al.(2012); Odeyinka et al. (2012a,b)and Odeyinka
(2015) suggested that as an obligation and the basis for reward, clients,
contractors, financiers, and other stakeholders should carefully consider the
expanding variance between feasibility and final account.
Other wide
range implications of cost deviations are prominent. First the perception of
the stakeholders in a project is affected (Hobbs, 2010). Project financing is
difficult and possible abandonment is imminent. The most prevalent impact of
cost deviation is delay and disruption. The effects and causes of delay and
disruption is widely studied across geographical spread but the implications
lean towards similar results (Aibinu and Jagboro, 2002; Sambasivan and Soon,
2007; and Haseebet al. (2011). These include time overrun, dispute,
arbitration, total abandonment and litigations (Kikwasi, 2012). This study
therefore seeks to determine the contribution of estimating to overall cost
discrepancy between budget and final account.
1.3 Research Questions
The
following are constructed to achieve the aim of the study:
- What are the factors affecting the
accuracy of feasibility estimating?
- What are the preferred tools, level of
use and level of accuracy feasible estimating?
- What is the relationship between
feasibility estimate and final account of building projects?
1.4 Aim and Objectives of the Study
The aim of
the study is evaluate the effect of feasibility estimate on the final account
of building projects with a view to enhance efficiency. The objectives of the
study include the following:
· Identify factors affecting the
accuracy of feasibility estimates for building works;
· Evaluate stakeholders’ preference,
level of use and the accuracy of feasibility estimating techniques; and
· Determine the effect of feasibility
estimate on final account sum of building projects.
1.5 Research Hypothesis
The
following hypotheses were constructed to achieve the aim of the study:
Ho1: There
is no significant relationship between feasibility estimate and final account.
1.6 Significance of the Study
This study
has been necessitated by the fact that the first step towards solving a problem
is to identify it. Therefore, if the idea behind the generation of feasibility
estimate is well known and its effects on final account are identified and
possible remedies proffered and implemented, it will reduce the anxiety being
faced by clients in going into infrastructural project development due to high
level of uncertainty of their financial commitment, thereby encouraging the
growth of infrastructural development. It will also significantly reduce the
incidences of project cost overrun.
Contractors
and clients will benefit from this work since they are in no wining position
when there is a fall in the level of infrastructural projects development.
First, the evaluation will enhance improved project delivery and overall
realisation of the project targets. Second, it will facilitate stakeholders’
assessment of their level of effort towards the realisation of projects’ set
objectives across the various stages of the project. Third, the outcome will
improve procurement in option used and the projects procured amidst enhanced
effective assessment management of cost overruns.
1.7 Scope of the Study
There are
construction industries in every state of the country; the study was restricted
to construction industries and projects in Akwa Ibom State. This research has
been limited by constraints such as time, money and related literature on the
topic. The limited financial resource of the researcher is a major limitation
and thereby resulted in limiting the study to Akwa Ibom State only. Due to hard
time, cost of research materials are high, certain materials which could be
useful may not be affordable.
The
reluctance of professionals/consultants to give information to research
students is clearly known, it becomes hard as potential respondent will always
believe that the information might expose the firm or company.
1.8 Organisation of the Work
The project
is divided into five chapters. Chapter one is the introduction. Chapter two is
literature review. Chapter three is the research methodology where all the
technique, procedure and tools of analysis of data would be presented. Chapter
four is the data presentation and analysis. Chapter five is the summary,
conclusion and recommendation.
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